Will we see more activists using proxy access?

You might recall that, on November 9, 2016, GAMCO Asset Management Inc. (an entity affiliated with activist investor Mario Gabelli) and certain affiliates used the proxy access bylaws recently adopted at National Fuel Gas Company, an NYSE-listed diversified natural gas company, to nominate a candidate for election to the company’s board at its 2017 annual meeting. It is the first known use of proxy access bylaws to make a nomination. (Here is a link to the related Schedule 14N.) As I noted in this PubCo post, it was especially ironic that the first use of proxy access would be by an activist investor, given that the conventional wisdom has been that activists were unlikely to use proxy access and would opt instead for more traditional election contests. Some commentators still think that will be the case.

SideBar: And even more ironically, it turns out that Gabelli opposes proxy access!! In this excerpt from an interview with Mario Gabelli in Agenda, conducted after the announcement, Gabelli indicated that he “thinks it’s a bad idea for companies to allow investors to use proxy access and that the right should be rescinded. The notion of investors’ owning 3% of a company’s stock while not knowing anything about its fundamentals and using proxy access to advance a non-economic agenda ‘is a mistake,’ Gabelli says. Still, he says, ‘it’s part of the rules of the road, and we decided to take this avenue’.… He says Gamco is still trying to figure out how the proxy access nomination will shake out.”

For example, this memo from CamberView Partners, “Activist First to Use Proxy Access in US: GAMCO Targets National Fuel Gas,” suggests that GAMCO’s use of proxy access is likely to be anomalous among activists. In its analysis, CamberView contends that GAMCO typically employs a more economical approach than other activists, which may explain its recourse to proxy access:

“It is important to consider the nature of GAMCO’s typical approach, which may limit the ability to draw conclusions from this particular situation about the use of proxy access by traditional activist investors. GAMCO has run 42 campaigns for board representation in the past 6 years, securing seats at 16 companies…. GAMCO typically utilizes tactics requiring lower cost and time investment by eschewing the detailed investor presentations and other advocacy tools typically deployed by a dissident. Furthermore, GAMCO’s nominees are often closely associated with the fund, in contrast to the high-profile independent nominees typically proposed by more traditional activist investors. GAMCO’s cost-conscious strategy makes proxy access a logical method for the fund to seek board representation. However, it is unlikely most activist investors will use proxy access due to, among other things, the need to satisfy the bylaw’s typical three-year holding period requirement, a willingness to expend significant resources on a proxy fight, typical company bylaw restrictions on an activist’s intent regarding changing or influencing control at the company through the proxy access mechanism, and additional restrictions on the activist’s solicitation efforts.”

Similarly, this post from Activist Insight observes that GAMCO is “not a typical activist.” It tends to hold shares in mutual, not hedge, funds, and retain them for substantial time periods. Moreover, “it has a habit of doing things differently, sponsoring a precatory (non-binding) proposal promoting a spinoff at National Fuel Gas a few years ago, and often soliciting proxies in-house for proxy contests proper (saving proxy solicitor fees that often run in the hundreds of thousands of dollars, and millions for the biggest fights).” In speaking with GAMCO’s general counsel, the author learned that, for GAMCO, “reducing the cost of activism was appealing; ‘you can piggyback on someone else’s proxy,’ he said.”

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